“Green premium” to increasingly drive investor demand for real estate, LaSalle research finds
Hong Kong (03 August 2017) – Environmental factors will contribute significantly to the financial performance of real estate portfolios over the coming years, and investors will need to put increasing focus on this ‘green premium’ if they are to maximise returns, according to LaSalle Investment Management’s ‘Environmental Factors & Real Estate Demand’ whitepaper.
The report notes that while few investors are willing to sacrifice return or to increase risk for the sake of improving their sustainability credentials, a growing pool of investors are asking fund managers and REIT Chief Executives to report on their progress toward establishing and meeting environmental and sustainability goals. More investors are also gaining an awareness of the published evidence that shows that, in many situations, investments in sustainability improve asset-level and portfolio-level financial performance.
LaSalle believes that the Environment (E) factors – which join the Demographics, Technology and Urbanization (DTU) factors previously identified by LaSalle as the secular drivers of real estate demand –are worthy of examination on every investment considered by a real estate fund manager in much the same way that supply-demand factors are analyzed, priced, and brought into the risk-return evaluation of each asset. By focusing on these factors, real estate owners can improve a building’s flexibility, resilience and efficiency.
Elysia Tse, Head of Research & Strategy, Asia Pacific, LaSalle Investment Management, said: “Although sustainable features in Asian buildings are currently not prevalent, sustainability standards in global real estate are changing due to evolving certification systems, market forces and governments recognizing the need to involve the real estate sector in order to meet their climate change objectives. There could be early-mover advantage for those firms which are able to seize the opportunities.”
Tse added, “Mainstream investment analysis is still early in the process of recognizing the impact of these factors, hence investor payback for improving the environmental performance of buildings could become a strong contributor to financial performance. Our research finds that buildings with green attributes deserve a higher price in recognition of their lower risk profile, and that investors could therefore consider accepting returns that are 65 basis points lower for the right property.”
Australia is well-advanced and standard-setting is a shared responsibility of local governments and industry associations. China recently made environmental improvement a national priority, but the regulatory focus has been on manufacturing and transportation more than on real estate. In other Asian markets such as Singapore, Hong Kong and Japan, governments have set national long-range energy reduction targets that also apply to the real estate industry.
Tom Miller, Chief Sustainability Officer and Head of Development for LaSalle in Asia Pacific, said: “We expect that ‘sustainability’ will gradually expand from a focus that is only on the management of a building’s ‘carbon footprint’, to include the inevitable consequences of climate change. And by raising environmental considerations as worthy of close attention, we suggest that they will, in time, have the power to drive long-term occupier and investor demand on a vast scale equivalent to the original DTU factors we identified over six years ago.”
“Investors are already following the lead of tenants and placing more significance on the consideration of ESG (environmental, social and governance) factors in their investment decisions. Those who excel at understanding the E-Factors and incorporating this knowledge into their asset underwriting and asset management practices can achieve the maxim of doing well (financially), while doing good (for the planet).”
Over the last ten years, LaSalle has developed a strong commitment to environmentally sustainable practices in the operation of the buildings it manages. It was an early signatory to the United Nations Principles of Responsible Investment that reinforced its commitment to factors beyond financial performance when evaluating investments. LaSalle also made a commitment in 2011 to capture baseline data and to monitor progress toward improvement goals for reducing the carbon footprint of the buildings it manages.
The full report is available upon request.
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About LaSalle Investment Management
LaSalle Investment Management is one of the world’s leading real estate investment managers with approximately $57.6 billion of private and public equity and private debt investments under management (as of Q1 2017). LaSalle’s diverse client base includes public and private pension funds, insurance companies, governments, corporations, endowments and private individuals from across the globe. LaSalle sponsors a complete range of investment vehicles including separate accounts, open- and closed-end funds, public securities and entity-level investments. LaSalle is a wholly-owned, operationally independent subsidiary of Jones Lang LaSalle Inc. (NYSE: JLL), one of the world’s largest real estate companies. For more information, please visit www.lasalle.com.